Energy Recovery Inc (NASDAQ: ERII), a leader in the design and development of energy recovery devices for desalination and other industrial processes, announced today the results of its third quarter ended September 30, 2011. With no shipments for mega projects and delayed OEM deliveries, the Company achieved net revenue of $4.9 million for the quarter, reflecting a 29% decrease as compared to the same period of last year. Low production volume in manufacturing, coupled with a mix shift that favored smaller devices, resulted in a gross margin of 15% in the current period as compared to 34% in the third quarter of 2010. The progressive qualification of ceramics production in California and the plant disruption associated with the closure in Michigan, both scheduled for completion by the end of this year, compounded the effects of negative operating leverage and unfavorable product mix, all of which combined to create a significant drag on margins in the current period. The Company’s restructuring and integration activities, however, are expected to generate significant cost savings in 2012 and thereafter.
In the third quarter of 2011, the Company exhausted its potential to carry-back net operating losses within the required look-back period of three years. Accordingly, net operating losses can no longer be applied on a look-back basis; rather, these losses must be carried forward to offset taxable income in future periods. Consequently, the Company recorded a valuation allowance against deferred tax assets and other adjustments in the current period, with a combined value of $4.5 million, in accordance with the accounting guidance and related interpretations regarding accounting for income taxes. Although management clearly believes in the long-term strategic direction of the Company and its future earnings potential, projected revenue and profit in subsequent years do not outweigh prior cumulative losses when assessing the need for a valuation allowance under accounting standards.